Given its challenges with its legacy-hardware networking business, Cisco Systems (NASDAQ:CSCO) is looking to propose more x-as-a-service solutions. Last week, the tech giant made an important step in that direction with a video-streaming optimization offering that could have a significant impact on the competitive landscape in several areas.
More video streaming
The world is hungry for video streaming. Cisco estimates global internet traffic will grow at a compound annual rate of 30% by 2022. And by that time, consumer internet video traffic should increase to 82% of overall consumer internet traffic, up from 73% in 2017.
In addition, internet users expect their online videos and applications to be delivered fast. To address that demand, content delivery network (CDN) providers have been building data centers around the world to host content closer to users. The legacy CDN provider Akamai Technologies dominates that market, but smaller, specialized CDN players have emerged. For instance, Fastly and Cloudflare have developed innovative and programmable solutions, while Limelight Networks (NASDAQ:LLNW) has been focusing on optimizing video streaming.
Thus, CDN represents an attractive market the research company MarketsandMarkets estimates will be $22.1 billion by 2024, up from $12.4 billion last year.
That should bode well for Cisco as it sells network devices and software to build such infrastructures. But the company is facing challenges against the cloud-network specialist Arista Networks. For instance, the high-growth CDN provider Fastly revealed a few years ago it optimized its network with Arista's solutions.
More generally, Arista increased its market share in the larger high-speed, data-center switching market from 10% in 2015 to 16.3% during the first half of this year, according to Crehan Research. In contrast, Cisco's market share decreased from 64.7% to 43.7% over that time frame.
An innovative video-streaming optimization offering
However, Cisco is trying to reverse that negative trend. It announced last week a partnership with the cloud video-streaming specialist Qwilt to offer an as-a-service solution for telecommunications service providers. Cisco will bundle its servers and network devices with Qwilt's cloud software into a solution that service providers can implement at their edge network locations (close to users) to improve the delivery of video streaming.
The partnership between Cisco and Qwilt makes sense. The tech giant can take advantage of its huge footprint and multi-decade experience with service providers to deploy Qwilt's innovative solution at scale. Also, in contrast with network vendors such as Arista and Juniper Networks, Cisco's large portfolio includes servers that allow the company to propose an integrated computing infrastructure that supports Qwilt's software.
The offer seems attractive for service providers, too. They can quickly leverage their satellite locations with Cisco's packaged solution to improve their customers' video-streaming experience. And they can offer a streaming-optimization service to content providers. Also, instead of relying on traditional CDNs, they get end-to-end control of their networks.
Besides, Cisco packaged this offering as a service to facilitate its adoption from a financial perspective: Customers pay a recurring fee instead of dealing with significant upfront capital expenditure to deploy that infrastructure.
A threat to CDNs
Cisco's partnership with Qwilt will intensify the usual competition between network vendors for the service provider and CDN markets. But CDN players are facing a bigger threat as service providers will become direct competitors.
Content providers could prioritize service providers over CDNs to optimize the delivery of their content. In addition, service providers that also propose content won't need to rely on CDNs anymore. For instance, the giant British telecom provider BT Group has chosen Cisco's solution to optimize the distribution of its content and improve the experience of its customers.
The impact of such a threat to CDN providers depends on the importance of video streaming relative to their businesses, though. Limelight Networks should be the most exposed as it has been focusing in that area. Interestingly, Limelight Networks partnered with Qwilt in 2017 to improve the performance of its network; it remains to be seen how that relationship will evolve as Qwilt's offering gains traction under Cisco's umbrella.
Thus, investors should pay close attention to Cisco's new video-streaming solution over the next several quarters. It is likely to impact the competitive landscape among CDN, network, and telecom stocks.